The Facebook IPO: It's About Tax Savings

Facebook IPOThe Facebook IPO news is rolling strong this year as one of the biggest IPOs since Google went public years ago.  It’s not surprising really, with 800 million people using the social site and the billions of dollars the IPO will generate for early investors and employees.  Just think of all the new millionaires and billionaires that will be added to Forbes richest people list once the company is public.  Which is the real reason behind the Facebook IPO this year and a great lesson in tax planning.

The current estimates value Facebook at $75 to 100 billion with an estimated $3 billion in revenues.  The IPO will raise $5 billion for the company.  It doesn’t need the extra funds with a current cash hoard of over $3 billion still sitting in its coffers and has no plans for the money either.  Which leaves the real reason for going public, to allow early investors and employees to take advantage of tax savings from the $70 to 95 billion in personal wealth generated at the IPO.

All those newly created millionaires and billionaires will want to cash out a couple of those shares to buy big houses, expensive cars, yachts, all the things new-found wealth can buy.  The kicker, by going public in early 2012, the shareholders will save on capital gains tax.  Which means more money for them.  It’s good to see greed and smart tax planning alive and well in Silicon Valley.

Currently capital gains tax falls under two categories long-term and short-term capital gains.  Short term capital gains are taxed at normal income tax rates.  But long-term capital gains, the most it can be taxed is 15%.  A big reason to hold on to investments for at least a year.  Just ask Mitt Romney!

By going forward with the IPO this year, it’s a certainty what the taxes will be.  If Zuckerberg had decided to wait till next year, who knows what the tax consequences are in waiting.  Most certainly more taxes would be paid.  Currently the capital gains tax is set to increase in 2013 to a cap of 20%.  Depending on who is sitting in Congress and the White House those tax laws will change and most likely higher.  With all the uncertainty it could easily rise to regular income tax rates and not worth the risk.

Even if the current capital gains tax is only increased 5% more next year, the Facebook shareholders are better off selling some shares now.  The difference between 15% and 20% doesn’t seem like much until you remember we’re discussing billions.  The potential is there for at least $5 billion in tax savings by going public this year if every shareholder cashed out.

I doubt they will sell everything, but current shareholders will want to capitalize on their new-found wealth as quickly as possible which requires selling a few shares.  Even with a lock up period of 4 to 6 months, it would give enough time for insiders to sell their shares before the end of the year and save on the capital gains tax.

The alternative, of course, is to wait, which is risky.  This may be the last time that we see capital gains taxes this low.  At least for several years.  Last time I checked, I’ve never met anyone that likes to pay more taxes.  I’m sure many will be taking advantage of the lower capital gains tax to cash out a few shares.  I certainly would be.

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  1. says

    I think Zuckerberg himself is going to be paying a passive amount of taxes. Apparently he is going to exercise options to buy another 120 million shares (his options give him the right to buy at 6 cents a pop). So, depending on what Facebook sells for on its IPO, he could owe billions in tax for a single day, haha. The Treasury must be salivating!

  2. says

    I am a passive, value style investor, so I almost always pay the long term investment rate. However, sometimes it is better to sell early and bite the bullet on the taxes. I would rather pay an extra 5% of a profit than take a loss.

  3. Neo says

    This is also about timing the market, the S&P 500 is up 100%+ from the lows of March 2009. So, Facebook is getting a 100x earnings valuation because the markets are rallying (whether it feels like it is rallying or not… i.e. Greece, debt, politics, etc..)

  4. says

    I avoid buying during an IPO. I don’t understand how it works well enough to consider it anything more than a toss of the dice.

    OTO, I would happily be selling a huge chunk of my shares if I owned some.

    • J.P. says

      Most people don’t have the capital or clout to get in on an IPO through the underwriter. But if you can, there is a chance to make a lot of money.

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